Accounting Information System Answer Key Chapter 13

ANSWER KEY 1. A 2. C 3. B 4. D 5. C 6. D 7. A 8. D 9. C 10. B 11. B 12. D 13. C 14. B 15. C 16. A 17. D 18. D 19. A 20. D 21. A 22. B 23. A 24. B 25. A 26. B 27. C 28. D 29. C 30. B 31. A 32. C 33. A 34. B 35. C 36. B 37. C 38. C 39. D 40. B 41. B 42. B 43. C 44. A 45. C 46. A 47. B 48. D 49. C 50. D 51. C 52. A 53. C 54. B 55. C 56. C 57. D 58. B 59. D 60. The HRM/payroll cycle is a recurring set of business activities and related data processing operations associated with effectively managing the employee work force. Important activities in the HRM/payroll cycle include the following tasks: Recruitment and hiring of new employees. Training. Job assignment. Compensation (payroll). Performance evaluation. Discharge. 61. Hourly rate; Piece rate (based on some form of production activity); Fixed salary; Commission based on sales or some quantitative measure; Salary plus commission; Bonus incentives; stock options. 62. Payroll deductions include: Payroll tax withholdings such as federal, state, and local income taxes social security taxes, unemployment taxes; Voluntary deductions such as contributions to a pension plan, premium for group life, etc. 63. Accurate records of cumulative earnings are necessary because social security and other deductions have maximum earnings amounts upon which taxes are paid; and the appropriate amount of income and payroll taxes should be remitted to the government agencies. 64. The payroll register is a report that lists each employee's gross pay, payroll deductions, and net pay for each pay period. The deduction register lists the voluntary deductions for each employee. The earnings statement lists the amount of gross pay, deductions, and net pay for the current period, as well as providing year-to-date totals. 65. A payroll service bureau is a company that can be hired as an independent contractor to maintain the payroll master file and perform the payroll processing activities for an organization. 66. A professional employer organization is a company that provides not only full payroll services but also provides HRM services such as employee benefit design and administration. 67. An HRM/payroll system relies on input from various sources. Employees provide input when they make changes in their discretionary deductions (contributions to charities or retirement plans); various departments provide data about the actual hours employees work. The HRM department provides information about employees who have been hired or terminated, pay-rate changes, and promotions. Government agencies provide tax rates and various instructions for meeting regulatory requirements. Insurance companies and other organizations provide instructions for calculating and remitting various withholding amounts. 68. Sales staffs are often paid either on a straight commission basis or a combination of a salary plus commissions. This is done to keep sales at a certain level or to increase sales. The HRM/payroll system will need input from the sales and other cycles to properly calculate commissions and bonuses for such employees. It is important that an incentive and bonus system sets realistic, attainable goals that are congruent with corporate objectives. It is also important that managers monitor incentive and bonus goals and ensure that the attainment of such goals is appropriate for the organization and does not lead to undesirable behavior, which can result from poorly designed incentive schemes. 69. Direct deposit of paychecks provide a savings to employers because the costs of purchasing, processing, and distributing paper checks is eliminated. Using direct deposit also reduces postage and bank fees. The cashier's time can be better spent because paychecks do not have to be signed. Employees save time as well as they do not have to make a physical trip to the bank to cash their checks. Direct deposit is safer as it eliminates misplaced paychecks and reduces the possibility of the theft of checks. 70. Soft assets represent intangible employee skills and knowledge in the organization, whereas hard assets represent tangible assets like buildings, land, or machinery. Many established information technology companies like Microsoft and new Internet companies like Amazon.com have relatively few hard assets (termed "bricks and mortar" in e-commerce). Their market value represents primarily the skills and knowledge of their employees. The accounting profession has traditionally ignored this "intellectual capital" due to problems with establishing objective valuation methods. Under GAAP, assets mean resources "owned" by an organization. Human resources, using this definition, are not assets since they are not "owned" by the company. Thus, salaries, bonuses, commissions, and direct labor are recorded by an AIS as expenses--there is no comprehensive review of measurement and reporting of human resources as assets. To help enable such measurement and establish value, an AIS should be integrated with the HRM system so employee costs and information about employee skills and knowledge can be readily accessed. 71. The following questions should be considered: How much does the service cost? How would the data be submitted-online or hand carried? What kind of reports and documents could be obtained from the service bureau? How would the service interface with the existing general ledger system? What resources are now being devoted to payroll and how could these resources be re-deployed into other areas? Could security and control be improved by the outsourcing? What would be the time length of a contract for outsourcing services? Could the service bureau system be integrated so that an online query could be made by the organization? What kind of track record does the service bureau have with other clients? Are there new technologies and approaches that would become available to the company via the service bureau? Advantages: No need to deal with complexity and changes in tax codes. No need to worry about what to do if equipment crashes. Less chance of employees accessing the payroll files (confidentiality). Possible efficiency and cost reductions. Wider range of benefits. Reed-up computer resources. Disadvantages: Less control over the payroll files because they are stored off-site. Extra costs for any special reports. Slower response to adhoc queries. 72. All payroll transactions are properly authorized. All recorded payroll transactions are valid. All valid, authorized payroll transactions are recorded. All payroll transactions are accurately recorded. Applicable government regulations regarding remittance of taxes and filing of payroll and HRM reports are met. Assets (both cash and data) are safeguarded from loss or theft. HRM/payroll cycle activities are performed efficiently and effectively. 73. Many problems may result when there are unauthorized changes to the payroll master file. Unauthorized changes may be made to employee pay rates, resulting in the company paying too much in wages. "Ghost" or "phantom" employees may be added to the payroll master to divert funds to dishonest employees through the issuance of paychecks to such "employees." Likewise, terminated employees may still be paid, resulting in the fraudulent diversion of payroll funds. Two controls that should be implemented and maintained to provide overall control of the payroll master file: proper segregation of duties and controlling access to the file. Good internal control dictates that only authorized HRM personnel be allowed to update the payroll master file for any hiring, termination, pay raise, and promotion. HRM personnel, who have such access to the payroll master file, should never be allowed to directly participate in actual payroll processing or paycheck distribution. This way an adequate control is created to match actual paychecks (or earnings statements when direct deposit is in place) with employees when a manager, supervisor, or other third party hand out the checks (or earnings statements). Also, a different individual should approve all changes to the payroll master file in writing other than the individual who recommends or initiates the changes. User IDs and passwords should always be used to control access to the payroll master file, and an access control matrix should be established to define what actions each authorized employee is allowed to make and confirms the files the employee may access. 74. Three types of controls can be used to circumvent payroll errors in an HRM/payroll system. Batch totals are used to verify totals entered into the system both at the time of data entry and at each stage in the processing. Hash totals are particularly useful in this regard, since hash totals calculated at the time of original data entry and again at each stage in the process can be compared. When the comparisons match throughout the process, three conclusions can be made: 1) all payroll records have been processed; 2) the data input was accurate; and 3) no bogus time cards were entered at any point after initial input. Upon completion of a payroll, the payroll register should be cross-footed to verify that the totals of the net pay column and other deduction columns equal the total of the gross pay column. A third control is the use of a payroll clearing account. This is a general ledger account that can be used as part of a two-step accuracy and completeness process. First, the payroll control account will be debited for the amount of the gross pay for the pay period; cash and other various withholding liability accounts are credited. Second, the cost accounting process distributes labor costs to various expense categories and credits the payroll control account for the total amount of the debits made to the other accounts. The result is that the payroll control account will have a zero balance. This becomes an internal check known as a zero balance check, indicating that the proper postings have been made to all of the accounts associated with payroll for a given pay period. Chapter 13 MULTIPLE CHOICE 1. Which activity below is not performed by the HRM? a) b) c) d) compensation training discharge recruitment and hiring 2. In most companies the HRM/payroll cycle activities are accomplished by two separate systems. Which task below is typically not performed by an HRM system? a) b) c) d) training performance evaluation compensation recruiting and hiring of new employees 3. What is the payroll system's principal output? a) b) c) d) hiring information checks to employees checks to government agencies internal and external use reports 4. Which area provides information to the system about hiring, terminations, and pay rate changes? a) b) c) d) payroll timekeeping purchasing HRM 5. Which of the following is not one of the major sources of input to the payroll system? a) b) c) d) payroll changes time and attendance data checks for insurance and benefits withholdings and deduction requests from employees 6. In the payroll system, checks are issued to a) b) c) d) employees and to banks participating in direct deposit. a separate payroll bank account. government agencies. All of the above are correct. 7. Some companies have created a position called "director of intellectual assets." What is the objective of this position? a) measurement and development of intellectual assets and human resources b) implementation of a more integrated HRM/payroll system c) improvement of the hiring and firing procedures in the company d) All of the above are correct. 8. Some stock analysts believe that a company's human resources may be worth several times the value of its tangible assets. However, the AIS typically does not account for or track such assets. Why is this the case? a) Employees are not "owned" by the company, and may not be considered an asset. b) Financial statements report on assets that have not yet been used by the organization. c) The value of human resources is only acknowledged when used and is tracked as an expenditure and not an asset. d) all of the above 9. Employee turnover will always occur and some experts believe it may even be desirable in an organization. Experts estimate that on average the costs associated with replacing an employee are about __________ that of the employee's annual salary. a) b) c) d) one-quarter one-half one and one-half twice 10. Payroll is one AIS application that is processed in __________ mode. a) b) c) d) sequential batch real time safe 11. The first step in the payroll process is to a) b) c) d) calculate gross pay. update the payroll master file. input time card data. print paychecks. 12. The payroll master file is updated with a) b) c) d) new hire and termination data. changes in pay rates and discretionary withholdings. changes in time card data. A and B above are correct. 13. When a person quits or is terminated from a company, what should be done with the person's record in the payroll system? a) It should be deleted immediately to prevent bogus paychecks from being issued. b) It should be kept indefinitely. c) It needs to be kept at least until the end of the current year. d) There is no rule about the retention of payroll records. 14. Given the four activities below, which of the HRM/payroll cycle activities occurs infrequently relative to the others? a) b) c) d) updating of the payroll master file updating information about tax rates and withholdings validating each employee's time and attendance data preparing payroll 15. Time cards are generally used for employees who are paid on a(n) a) b) c) d) monthly basis. overtime basis. hourly basis. production or piece-rate basis. 16. For recording time spent on specific work projects, manufacturing companies usually use a a) b) c) d) job time ticket. time card. time clock. labor time card. 17. Which category of employee below is least likely to use a time card or electronic time clock to track their hours? a) b) c) d) employees who manufacture a product accountants attorneys managers and professional staff 18. Regarding the use of incentives, commissions and bonuses in payroll, which of the following statements is false? a) Using incentives, commissions, and bonuses requires linking the payroll system and the information systems of sales and other cycles in order to collect the data used to calculate bonuses. b) Bonus/incentive schemes must be properly designed with realistic, attainable goals that can be objectively measured. c) Poorly designed incentive schemes can result in undesirable behavior. d) All of the above are true 19. Many companies use incentives and bonuses to motivate greater productivity and better quality work. An effective bonus/incentive system should incorporate realistic, attainable goals that can be objectively measured. What is not a desired result of an employee bonus/incentive system? a) employees may recommend unnecessary services to customers in order to exceed set sales quotas and earn a bonus b) employees may look for ways to improve service c) employees may analyze their work environment and find ways to cut costs d) employees may work harder and may be more motivated to exceed target goals to earn a bonus 20. Which of the following is most likely to be a daily activity in the HRM/Payroll system? a) b) c) d) Approve payroll disbursement Prepare paychecks Sign payroll checks Update HRM/Payroll database 21. A manufacturing company is likely to use __________ to collect employee time data for payroll and job time. a) b) c) d) badge readers supervisor's entries preprinted time cards retina scanning 22. These are used to transmit time and attendance data directly to the payroll processing system. a) Badge readers b) Electronic time clocks c) Magnetic cards d) None of the above 23. Payroll deductions fall into the broad categories of __________ and __________. a) b) c) d) payroll tax withholdings; voluntary deductions unemployment; social security taxes unemployment taxes; income taxes voluntary deductions; income taxes 24. Which of the following deductions is not classified as a voluntary deduction? a) b) c) d) pension plan contributions social security withholdings insurance premiums deductions for a charity organization 25. Which type of payroll report contains information such as the employees' gross pay, payroll deductions, and net pay in a multicolumn format? a) b) c) d) payroll register deduction register employee earnings statement federal W-4 form 26. Which type of payroll report lists the miscellaneous voluntary deductions for each employee? a) b) c) d) payroll register deduction register earnings statement federal W-4 form 27. Which type of payroll report includes the details of the current paycheck and deductions as well as year-to-date totals for each category? a) b) c) d) payroll register deduction register earnings statement federal W-4 form 28. Which HR report is used in preparing labor-related reports for government agencies? a) b) c) d) payroll register deduction register skills inventory workforce inventory 29. Which HR report is useful in planning future workforce needs and training programs? a) payroll register b) deduction register c) skills inventory report d) workforce inventory 30. Which HR report is sent to each employee for use in preparing individual tax returns? a) Form 941 b) Form W-2 c) Form W-4 d) Form 1099 31. Why is a separate payroll account used to clear payroll checks? a) for internal control purposes to help limit any exposure to loss by the company b) to make bank reconciliation easier c) banks don't like to commingle payroll and expense checks d) All of the above are correct. 32. One good way to eliminate paper paychecks is to a) b) c) d) pay in cash only. pay with money orders. use the direct deposit method to transfer funds into employee bank accounts. use EFT. 33. What step can be taken to reduce the distribution of fraudulent paychecks? a) b) c) d) have internal audit investigate unclaimed paychecks allow department managers to investigate unclaimed paychecks immediately mark "void" across all unclaimed paychecks match up all paychecks with time cards 34. This organization maintains the payroll master file for each of its clients and performs the payroll process. a) b) c) d) Cashier Payroll service bureau Professional employer organization Virtual private network 35. This organization provides payroll as well as other HRM services such as employee benefit design and administration. a) b) c) d) Cashier Payroll service bureau Professional employer organization Virtual private network 36. Which of the following is not a benefit of using a payroll service bureau or a professional employer organization? a) b) c) d) Freeing up of computer resources Increased internal control Reduced costs Wider range of benefits 37. Many companies offer their employees a "cafeteria" approach to voluntary benefits in which employees can pick and choose the benefits they want. This approach is normally called a(n) a) b) c) d) elective plan. menu options benefit plan. flexible benefit plan. pay-as-you-go plan. 38. The fourth step in the payroll cycle is preparing payroll. Pay rate information is needed in order to complete this task. The pay rate information is accessed by the system from __________. a) b) c) d) the employees' personnel files the employee subsidiary ledger the payroll master file electronic time cards 39. Part of the calculation necessary to process a payroll involves summing payroll deductions and subtracting the total from an employee's gross pay to arrive at net pay. Payroll deductions fall into two broad categories. Which deduction below would not be considered a voluntary deduction? a) b) c) d) disability insurance pension plan contribution union dues social security taxes 40. In a batch system, the payroll transaction file would contain a) b) c) d) entries to add new hires. time card data. changes in tax rates. All of the above are correct. 41. One step in the payroll cycle is the preparation of paychecks. In the next step the payroll register is sent to accounts payable for review. What is the following step in the process? a) The paychecks are distributed to the employees. b) A disbursement voucher is prepared to authorize the transfer of funds from the compans general account. c) The payroll taxes are computed. d) The earnings statements are printed. 42. The document that lists each employee's gross pay, payroll deductions, and net pay in a multicolumn format is called a) b) c) d) an employee earnings statement. the payroll register. a deduction register. an employee time sheet summary. 43. As the payroll system processes each payroll transaction, the system should also perform which activity listed below? a) allocate labor costs to appropriate general ledger accounts b) use cumulative totals generated from a payroll to create a summary journal entry to be posted to the general ledger c) both A and B above d) The HRM system should not perform either activity A or B. 44. Direct deposit of employee paychecks is one way an organization can improve efficiency and reduce payroll-processing costs. Which statement regarding direct deposit is incorrect? a) The cashier does not have to authorize the transfer of funds from the organization's checking account to a payroll checking account. b) The cashier does not have to sign employee paychecks. c) Employees who are part of a direct deposit program receive a copy of their paycheck indicating the amount deposited. d) Employees who are part of a direct deposit program receive an employee earnings statement. 45. Many demands are placed on the company's HRM/payroll system. For example, federal and state laws require employers to contribute a specified percentage of each employee's gross pay into certain funds. Such funds are used for a) b) c) d) social security taxes. flexible benefit plans. federal and state unemployment compensation funds. federal income taxes. 46. The employer pays a portion of some payroll taxes and employee benefits. Both the employee and employer pay which benefit or tax listed below? a) b) c) d) social security taxes federal income taxes state income taxes none of the above 47. Some organizations outsource their payroll and/or HRM functions in an effort to reduce costs. A third party that maintains the payroll master file for each of its clients and processes payroll for them is called a) b) c) d) a professional employer organization (PEO). a payroll service bureau. a value-added network. an electronic data interface. 48. When using electronic documents, __________ increase the accuracy of data entry. a) b) c) d) access controls separation of duties general controls application controls 49. The key to preventing unauthorized changes to the payroll master file is a) hiring totally honest people to access and make changes to this file. b) segregating duties between the preparation of paychecks and their distribution. c) segregation of duties between the authorization of changes and the physical handling of paychecks. d) having the controller closely review and then approve any changes to the master file. 50. Which of the following is not a potential effect of inaccurate time data? a) b) c) d) increased labor expenses erroneous labor expense reports damaged employee morale inaccurate calculation of overhead costs 51. Which control would be most appropriate to address the problem of inaccurate payroll processing? a) b) c) d) encryption direct deposit cross-footing of the payroll register an imprest payroll checking account 52. What is the purpose of a general ledger payroll clearing account? a) to check the accuracy and completeness of payroll recording and its allocation to cost centers b) to make the bank reconciliation easier c) to make sure that all employees are paid correctly each week d) to prevent the cashier from having complete control of the payroll cycle 53. A "zero balance check" refers to which of the following control procedures? a) b) c) d) batch totals cross-footing the payroll register a payroll clearing account online edit control 54. Which of the following controls is inappropriate for payroll check writing? a) restrict access to blank payroll checks and documents b) use of a payroll clearing account c) someone independent of the payroll process should reconcile the payroll bank account d) sequential numbering of paychecks and accounting for the numbers 55. What is the best control to reduce the risk of losing payroll data? a) passwords b) physical security controls c) backup and disaster recovery procedures d) encryption 56. One threat to the HRM/payroll cycle is the potential for violation of employment laws. This threat relates directly to the process or activity of a) b) c) d) payroll processing. general activities found in the cycle. hiring and recruiting. none of the above 57. What is a potential threat to the activity of payroll processing? a) b) c) d) hiring unqualified employees poor system performance violations of employment laws unauthorized changes to the payroll master file 58. The results of an internal audit finds that there is a problem with inaccurate time data being entered into the payroll system. What is an applicable control that can help prevent this event from occurring in the future? a) b) c) d) proper segregation of duties automation of data collection sound hiring procedures review of appropriate performance metrics 59. Theft or fraudulent distribution of payroll checks is a potential threat to the payroll processing activity. What is one control that can be implemented to help prevent paychecks being issued to a "phantom" or "ghost" employee? a) b) c) d) the cashier should sign all payroll checks prenumber all payroll checks use an imprest account to clear payroll checks paychecks should be physically distributed by someone who does not authorize or record payroll SHORT ANSWER 60. Define an HRM/payroll cycle. What are the basic activities in an HRM/payroll cycle? 61. List the various ways used to compensate employees. 62. What are different types of deductions in payroll? 63. Why are accurate cumulative earnings records important? 64. Explain the functions of the payroll register, deduction register, and earnings statement. 65. What is a payroll service bureau? 66. What is a professional employer organization? 67. Discuss the various types of input into an AIS HRM/payroll system. 68. What are some of the benefits of using incentives and bonuses? What are some dangers? 69. Name some of the benefits of using electronic direct deposit to pay employees. ESSAY 70. What is the role of "soft assets" in the new information economy? Why has an AIS not reported on the company's human resources? 71. What factors should be considered in outsourcing payroll to a payroll service bureau? Discuss the advantages and disadvantages of using a payroll service bureau to process a payroll. 72. What are the control objectives in an HRM/payroll cycle? 73. Discuss the threat of unauthorized changes to the payroll master file and its consequences. 74. What controls are available to address the threat of payroll errors?